Steering post-Covid recovery

12 March 2021

The changeover at the US economic helm ushers in a stimulus-based approach to economic revival. But leadership handovers in Germany and Japan are not likely to replicate that policy shift. What does this mean for the new world order? flow’s Graham Buck and Clarissa Dann investigate

Looking back more than a decade later at the global crisis of 2008-09, it is clear that multilateral leadership was key in preventing a meltdown of the financial system.

As it became evident that no one country would be able on its own to prevent contagion spreading through the financial system, world leaders agreed to meet and develop a co-ordinated response. “It is the worst crisis in 100 years,” declared Japan’s Prime Minister Taro Aso in November 2008, after a G20 ‘Summit for the Financial Markets and World Economy’ called by US President George W Bush. He added, “But the crisis could be a chance at the same time. History tells us that when we overcome crisis, a new order is created. We should not be just flustered by the crisis.”1

An earlier example of G8 coordination had come in 2005 when seven members, excluding Russia, agreed to cancel a combined US$40bn of debt for 18 of the world’s poorest countries – 14 in Africa and four in Latin America/the Caribbean.2

By contrast there was no similar meeting of minds, or resolve, when the first outbreaks of coronavirus rapidly escalated into a global pandemic in early 2020. The story of Covid-19 response has been one of collaboration between scientists and pharmaceutical companies, but on a leadership level it has often been a case of each country doing its own thing, with varying degrees of success.

This article explores recent responses from global leaders to issues such as Covid-19 economic shock recovery and climate change threats at a time when, after an intense period of globalisation, the world has seen more of a retrenchment to more nationalist approaches. In her book The Weaponization of Trade, flow contributor Dr Rebecca Harding highlights why, “politicians have resorted to economic nationalism, using the rhetoric of conflict to recapture the lost territory of global leadership and to win the hearts and minds of their ‘populist’ electorates.”3

As the world rebuilds, so will its leaders need to seize what amounts to an opportunity. As The Economist put it in their article ‘Global leadership missing in action’ (18 June 2020), “the UN wants to use its 75th anniversary for a grand consultation on the future of multilateralism. Covid-19 has hijacked the global agenda. But it also creates an opportunity. Rather than destroying the system, the upheaval could spur countries into strengthening it. That will require planning for the future while tackling the crisis of the present. Today’s leaders need to emulate what their predecessors achieved so magnificently in 1945.”4

US climate change and fiscal responses

A spirit of international cooperation was hardly helped by the former President of world’s largest economy proclaiming an ‘America First’ policy for the past four years and opting out of efforts such as the Paris Agreement5  to mitigate the damaging effects of climate change. So, 20 January was a red letter day. Within hours of taking up residence at the White House as its 46th President, Joe Biden signed an executive action for the US to officially rejoin the Paris Agreement on 19 February. The withdrawal had, in fact, only been brief given the timing. 

The move, according to Scientific American6 “thrusts the Biden administration into a race to craft new emissions pledges that could help shape global ambitions on climate change”. White House officials “are under pressure to identify a 2030 carbon goal” ahead of an international climate summit to be hosted by the US in April. In the meantime, President Biden has already signed an executive order calling for the US to reduce its net greenhouse gas emissions to zero by 2050, and that goal includes making its electricity sector emissions-free by 2035.

However, in the article ‘Decarbonising America’ Joe Biden’s climate-friendly energy revolution’ in its 20 February issue, The Economist suggests that the new administration needs all the help it can get, due to the US’s lack of an ambitious national programme. “The vast majority of Republicans elected to federal office reject policies to cut emissions, which is why Congress has not seriously confronted the issue for more than a decade. The power of Republicans in the Senate made it pointless,” a situation made worse by some conservative Democrats also harbouring reservations.

Yet delaying any action to 2030 rather than starting now would almost double the cost of transition to a net-zero emissions economy, notes the magazine citing policy group Energy Innovation.

The other issue, as pointed out by the International Energy Agency (IEA) in June 2020, is the environmental cost of economic bounce-back. “After the global financial crisis in 2008, CO2 emissions quickly resurged back to their previous levels and beyond, on a wave of carbon-intensive stimulus spending. A repeat of this playbook in the aftermath of coronavirus could make the world’s most ambitious 1.5C warming limit – which was already ‘slipping out of reach’ – all but unattainable,” said the IEA.7

Indeed, the bounce back looks like being substantial. Pointer GDP produced by the Federal Reserve Board of Atlanta to estimate changes now estimates an advance of 10% for Q1 2021. As Deutsche Bank Research’s US economic team noted in the white paper US Economic Perspectives: Parsing the potential boost from the Biden fiscal plan, published 5 February, in the Biden administration’s first weeks, it “heeded Treasury Secretary [Janet] Yellen’s advice “go big” with its initial US$1.9trn proposal” to reactivate the American economy. The move “introduced the potential for meaningful upside risk to our already well above consensus economic forecast for this year,” they added.

On other issues, it is less clear whether the Biden administration will represent a clear change of policy; not least in future US relations with China. Officials “have tried to project a tough line on China in their first weeks in office, depicting the authoritarian government as an economic and security challenge to the US that requires a far more strategic and calculated approach than that of the Trump administration,” reported Ana Swanson of the New York Times on 17 February.

The newspaper also highlighted the economic cost to the US of the trade wars, citing a report from consulting firm Rhodium Group and the US Chamber of Commerce China Center found “steep costs from the kind of economic “decoupling” that Mr Trump pursued, including a US$190bn annual loss in American economic output by 2025 if all US-China trade was subject to the type of 25% tariff that [he] imposed on US$250bn of Chinese goods.”

Life after Merkel

"Germany finds itself confronted with an increasingly multipolar world, a (permanently) weakened liberal, rule-based world order and rapid technological change"
Deutsche Bank Research white paper Focus Germany: Germany in the next decade: Ambition and potential

2021 will be a case of “all change” for two other G8 economies. In Germany, it marks the 16th and final year of Angela Merkel’s chancellorship after four terms in office; a period that has brought stability not only to Germany, but the wider European Union. The federal elections are scheduled for 26 September 2021, and Merkel confirmed that she won't be seeking a fifth term.

As newswire France24 puts it, “With the coronavirus crisis raging around the world, the pandemic has played to her strengths as a crisis manager with a head for science-based solutions. A trained quantum chemist raised behind the Iron Curtain, Merkel has long been in sync with her change-averse electorate as a guarantor of stability and prosperity.”8 

Germany’s economic outlook in the near-term is positive. In their 24 February note Data Flash: Germany: Q4 GDP revised to 0.3%, supports our +4% GDP call for 2021 Deutsche Bank Research analysts Marc Schattenberg, Sebastian Becker and Stefan Schneider note that an increasing savings rate is set to fuel pent-up consumer demand once pandemic lockdowns relax. An even more positive manufacturing backdrop should provide a boost to growth from Q2 onwards and provide 4% GDP growth for 2021 as a whole. 

In Schattenberg’s subsequent report of 1 March, Focus Germany: German pent-up demand to boost growth in summer 2021, this demand is quantified: “At around €331.1bn, household savings in 2020 were almost €111bn higher than in 2018 and 2019 (€220.3bn). Assuming an additional €50bn for January/February 2021 (approximately equivalent to the increase from 2019 Q2 to 2020 Q2), this would result in around €160bn of involuntary savings” of which around 30% could flow back into private consumption this year, with the other 70% remaining in household deposits or assets for the time being.

This is the scenario likely to be inherited by former MEP Armin Laschet9, elected as new leader of the Christian Democratic Union (CDU) in early 2021, who is currently frontrunner to succeed Merkel as chancellor.

However, Germany “finds itself confronted with an increasingly multipolar world, a (permanently) weakened liberal, rule-based world order and rapid technological change,” stated Deutsche Bank Research’s team in their March 4 white paper Focus Germany: Germany in the next decade: Ambition and potential. The global shift in economic power has been accelerated by the pandemic and within the next two years, China will have overtaken the EU and the UK combined in terms of economic size (see Figure 1).

steering-post-covid-recovery-figure-1 Figure 1: Shift of economic power accelerated by the pandemic
Source: IMF WEO

For the new government complacency or reactive policies are no options, state the report’s authors. “‘High-Tech Made in Germany’ might turn out to be an upside scenario,” they caution. A “strong reform effort of both the government and corporate sector is needed in order to secure Germany’s place in the “best-of-all-worlds” scenario. This requires a proper allocation of R&D investments, reaping the benefits of industrial data and an accelerated diffusion of cross-sectoral technologies such as AI.

They add that among safer assumptions is that the country’s global role will be largely defined by the EU’s global role, which is something that Germany will be instrumental in shaping – helped by its considerable ‘soft power’ as defined in the 1980s by US political scientist Joseph Nye as a country’s ability to attract and persuade arising from its culture, political ideals and policies (see Figure 2).


Figure 2: Soft power index 2021: top 15 countries

Source: Global Soft Power Index, Brand Finance https://brandirectory.com/globalsoftpower/

Japan’s caretaker PM?

Japan’s prime minister since September 2o2o is former chief cabinet secretary Yoshihide Suga, who succeeded Shinzo Abe. The latter had pursued a policy dubbed ‘Abenomics’ during his eight-year second term of office – growing the money supply, increasing government spending, and enacting measures to make the economy more competitive – before announcing his intention to resign for health reasons as did not want his illness to impede decision making10

Japan is the runaway leader in terms of foreign direct investment (FDI) outflows – up to US$227bn in 2019 from US$143bn in 2018 – as monetary policy from the Bank of Japan pushed, as the Economist noted in 2018, “Japan’s banks, insurance firms and ordinary savers into buying foreign stocks and bonds that offer better returns than they can get at home”.11 In other words, the influence of Japanese investment – from investors and its corporates in terms of where they site their manufacturing hubs – continues to shape global economics.

Among Suga’s current concerns is the unique one of judging whether the Tokyo Olympics, postponed last year due to Covid-19, can still be held in relative safety in August 2021. On the economic front, as Deutsche Bank Research Chief Economist Kentaro Koyama noted in his February 12 white paper Japan Economic Perspectives: Japan Economic Outlook: Economic normalization – so near and yet so far, the near-term outlook is mixed after 12.7% year-on-year growth in Q4 2020 trimmed the contraction for the year as a whole to -4.8%. The forecast of 1.5% growth for 2021 at the start of this year was upped to 2.6%, but recovery is hampered “due to the extension of the state of emergency and the laggard vaccination schedule” while the forecast for 2022 is trimmed from 2.8% to 2.3%. “We do not expect real GDP to return to the level of pre-pandemic 4Q 2019 until 4Q 2021,” the report adds. More positively “Unemployment should peak at 3.3% in 2Q 2021 as government policies remain effective and the decline in unit labour costs stimulates demand for workers”.


Figure 3: Japan – outlook for real GDP

Sources: Cabinet Office, Deutsche Securities

Koyama thinks it unlikely that Japan will follow the US in passing major stimulus measures for a more dramatic economic recovery. “US economic policy mainly aims to generate jobs, whereas Japanese unemployment remains low. We see no justification for any similar aggressive fiscal spending in Japan at this time. One case in which Japan may increase spending is if the Olympics are cancelled.” A final decision on the Games is expected later in March and if they do not go ahead “the government may put together a supplementary budget after the FY2021 budget is passed.”


Figure 4: Real GDP in major economies pre-pandemic and 2020

Sources: Haver Analytics, Deutsche Securities

Return to multilateralism

Kristalina Georgieva"As we embark on this ascent, we are all joined by a single rope and we are only as strong as the weakest climbers. They will need help on the way up"
Kristalina Georgieva, Managing Director, International Monetary Fund

ngozi-okonjo-iweala Dr Ngozi Okonjo-Iweala, Director General of the World Trade Organization

Effective leadership of international organisations also has the potential to bring about coordinated responses to crises and bring economies together to solve common problems. We saw this in November 2008 when former World Trade Organization (WTO) Director General Pascal Lamy urged government action to close the liquidity gap in trade finance. He argued that “the world economy cannot grow above the limits of its real production, and feeding it by debt and liquidity may only provoke severe corrections”.12 His work with export credit agencies and development finance banks was transformational in getting trade flowing again.

On 15 February 2021 the WTO elected Ngozi Okonjo-Iweala, a Nigerian economist and former finance minister, became its seventh Director General (pictured13. She takes up the reins at a time when the WTO is at a crossroads in mapping its ongoing role and the future of global trade rules after former US President Trump’s levy of tariffs on China.

Dr. Okonjo-Iweala has her work cut out restoring faith in multilateralism. “The very proliferation of bilateral and regional trade agreements is a consequence of the lack of multilateral agreements,” she said in an interview before her appointment.14 Along with the free flow of anti-Covid-19 vaccines and medicines, she has put WTO rule reform at the top of her policy agenda to address the digital economy, electronic commerce, and services trade. “Actually, trade in goods is growing at a decreasing rate, but trade in services is growing at a really rapid pace—as are cross-border data flows,” she says.

The need for multilateralism is a message echoed by another female leader, IMF Managing Director Kristalina Georgieva15, who spoke in October 2020 of the global economy emerging from the depths of  crisis but warned that the calamity was far from over. “All countries are now facing what I would call ‘The Long Ascent’ – a difficult climb that will be long, uneven and uncertain,” she said. “And prone to setbacks.

“As we embark on this ascent, we are all joined by a single rope – and we are only as strong as the weakest climbers. They will need help on the way up.”

Deutsche Bank Research reports referenced:

US Economic Perspectives: Parsing the potential boost from the Biden fiscal plan by Matthew Luzzetti, Brett Ryan, Justin Weidner, Amy Yang (5 February)

Focus Germany: Germany in the next decade: Ambition and potential by Marion Muehlberger, Barbara Boettcher, Stefan Schneider, Sebastian Becker, Eric Heymann, Jochen Moebert, Marc Schattenberg and Jan Schildbach (4 March)

Focus Germany: German pent-up demand to boost growth in summer 2021 by Marc Schattenberg (1 March)

Data Flash: Germany: Q4 GDP revised to 0.3%, supports our +4% GDP call for 2021 by Marc Schattenberg, Sebastian Becker and Stefan Schneider (24 February)

Japan Economic Perspectives: Japan Economic Outlook: Economic normalization – so near and yet so far by Kentaro Koyama (12 February)


1 See https://reut.rs/3ryJtVk at reuters.com
2 See https://bit.ly/3bDDTeZ at brettonwoodsproject.org
3 See https://bit.ly/3rDbuv2 at londonpublishingpartnership .co.uk
4 See https://econ.st/3bBqDr1 at economist.com
5 See https://bbc.in/30z8vb6 at bbc.com
6 See https://bit.ly/38rQJek at scientificamerican.com
7 See https://bit.ly/3eu3TLq at carbonbrief.org
8 See https://bit.ly/38uY90e at france24 .com
9 See https://politi.co/38x8g4y at politico.eu
10 See https://bbc.in/2OD5jZf at bbc.com
11 See https://econ.st/3qDyQiT at economist.com
12 See https://bit.ly/2N5Aegi at wto.org
13 See https://bit.ly/3rJ6NA0 at wto.org
14 See https://brook.gs/3euSlYC at brookings .edu
15 See https://bit.ly/3l6WXVY at imf.org

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